REPUDIATION.

III.138.1

REPUDIATION. The history of the bonded indebtedness of the various states of the Union goes back to the period 1830-40. At the beginning of that decade the aggregate debt of the states amounted to about $13,000,000 only. Then began an era of extravagance, in which certain states entered upon a series of reckless undertakings that crippled the resources and ruined the credit of more than one commonwealth, whose name had formerly ranked high for commercial prudence and honesty. Two causes united to foster this spirit of prodigal expenditure: a natural demand for necessary internal improvements; and an easy means of raising large sums on long loans. By the act of congress of June 13, 1836, the surplus above $5,000,000 arising from the sale of government lands was allowed to remain on deposit to the credit of, or loaned to, the different states. In this way nearly $30,000,000 was put out, in three installments, a fourth, after some $28,000,000 had been paid, being postponed by the act of October, 1847, because of a reduction in revenue, owing to the requirement that land payments be made in specie and not in notes of the state banks. The great incentive to incur a heavy state debt, the demand for internal improvements, sprang from a natural and healthy cause. The annually increasing tide of immigration began to pour over the vast and fertile areas of virgin soil, in the development of which lay prosperity and fortune. But as yet the means of communication between the granaries of the west and northwest, the rice and cotton plantations of the south and southwest, and the markets of trade, were wholly inadequate to meet the needs of the cultivators. Rich in the natural products of the soil, money was so scanty with them that, even for the purposes of ordinary trade between themselves, they had to resort to barter. To the active and industrious farmer, or the keen and ambitious planter, an opening to the markets of the world, by new means of transportation which should insure quick delivery on reasonable terms, meant individual success and the commercial prosperity of his state. Private ambition and public spirit were skillfully played upon to induce voters to ratify with eagerness what doubtless seemed to many a public duty as well as a private gain. Railways and canals were begun, turnpikes constructed, river beds widened and "improved," and every scheme which bore on its face the slightest resemblance to a public work claimed the aid of the public credit, and, in the absence of constitutional safeguards, generally got what it claimed. Our national credit abroad stood high. The affairs of government had been economically administered, the interest on our foreign commercial debt promptly paid, and state securities found an easy sale in foreign markets. Good credit, great natural advantages of soil and climate, offering unmistakable promise of limitless development, and, above all, a pay day far ahead in the dim future, with only the interest account to provide for from time to time, proved temptations too strong for the young and growing communities. Within the twelve years succeeding 1830 the aggregate debt of the states had risen to over $200,000,000, an increment of more than 1600 per cent! It was distributed as follows:*73

III.138.2

Eastern states...

$ 7,158,274

Middle states...

73,348,072

Southern states...

73,340,017

Western states...

59,931,553

Total...

$213,777,916

III.138.3

—In May, 1838, after the passage of the general banking law, authorizing the United States comptroller to issue bank notes on a pledge of the evidences of public debt of the several states, a circular was issued by the comptroller, Mr. Flagg, requesting the financial officer of each state to return its indebtedness under authorized loans. According to their replies, it appeared that even then the aggregate debt, inclusive of the sums deposited with the several states by the United States ($28,101,644.97), amounted to $198,907,824,32. This indebtedness had been incurred for the benefit of railroads, canals, banks, turnpike companies, and kindred speculations. "The operations of the states have been so extensive and varied," said Hunt's "Merchants' Magazine," in 1839 (vol. i., p. 174), "that it is not an easy matter to get at the precise amount of stock issued and authorized to be issued. It is probable, however, that the aggregate amount of stock authorized by all the states is even greater than the amount stated in the tables."

III.138.4

—By 1836 the state of Indiana had already loaned a large portion of the surplus revenue derived from the United States, and in that year an act was passed appropriating the sum of $10,000,000 for a gigantic internal improvement scheme, covering no less than seven different enterprises, including canals, banks and railways. When we find that there were only 100,000 voters in the state at this time, the outlay, even if kept within the proposed limit, seems stupendous. Yet the expenditure was far beyond the expectations of the promoters. "The original plan of internal improvement was, as a matter of course, considerably extended, and it very soon became evident that $20,000,000 would not more than half suffice to complete any portion, in consequence of the necessity of spending all the money that could be got in all parts of the state at once. The negotiation of the bonds was also a source of most fearful jobbing which resulted in serious losses to the state." ("Merchants' Magazine," 1847, p. 577.) One of the bond commissioners, a Dr. Coe, was also one of the largest stockholders in the Morris Canal bank, the heaviest customer for the state bonds. According to the report of a legislative investigating committee, Dr. Coe received from his own company over $100,000 in commissions and profits; one item of which was 398 bonds, received by the company at par, when they were worth about fifteen cents on the dollar—a difference of about $33,680! Within a very short time the pressure began to be felt. Depression in foreign commercial centres caused a tightness of the money market all over the world. By 1841 Indiana found herself without the means of defraying the running expenses of government. The money for the civil list had to be raised, and the state was again forced to go upon the market as a borrower, pledging her bonds at ruinously low rates. "The majority of the 100,000 voters then occupying Indiana," says a writer, six years later, "were small farmers living in log huts, depending on the sale of surplus pork and grain for the purchase of their necessaries; and the expectation of drawing $1,000,000 per annum from such sources, to pay the interest or principal of debts contracted for legislative purposes, was not realized. The capital employed in trade in Indiana was scarcely $3,000,000, and it was proposed to draw 50 per cent. of that every year to pay interest!" In 1841 the interest account fell behind, and an attempt was made to settle by an issue of 7 per cent. five-year bonds, but these the creditors, who had already begun to distrust the state's pledges, refused to accept in exchange for their interest coupons, to any appreciable amount. The distress spread so that it seemed to affect every department of government. The assessment for tax purposes was wretchedly conducted on a wholly erroneous system of valuation, until finally the people became convinced that the taxes could not be paid. From this to hopeless and acknowledged insolvency the plunge was rapid. In June, 1839, the tax of thirty cents, levied in 1838 to meet the internal improvement interest, was reduced to fifteen cents, and by 1840, after various fruitless attempts at settlement and compromise, all effort to pay the state interest had been abandoned.

III.138.5

—Ohio began her borrowing in 1825, by pledging all the canal profits as security for loans authorized for the benefit of internal improvement schemes. Under the law of 1836-7 she had gone on increasing her expenditures, loaning the state credit to turnpike and other companies, subscribing for their stock and running into debt with contractors. Her credit fell, and yet it was impossible either to go ahead or to give up the work without money. In 1841 the legislature passed an appropriation bill of $2,301,625. The commissioners of the canal fund were authorized to raise $981,000 of this amount, with which to meet the demands of the contractors, at any rate of interest, and the remainder on 6 per cent. bonds, payable in 1860. The bankers of London and New York would not touch the loan, and it was finally proposed, at an extra session of the legislature convened for the purpose, to raise the rate of interest to 10 per cent. and go into the foreign market on the best procurable terms! Under this provision the state was squeezed like a sponge. Fortunately her immense resources proved equal to the terrible strain. The people were honest, the sophisms of repudiation gained little ground, and the legislature by various enactments provided for the interest and a sinking fund with which to meet the principal.

III.138.6

—Even the eastern states were affected by the universal mania for reckless expenditure which obtained throughout the country during the years 1834-6. Massachusetts pledged her credit without taking care to provide sure means of payment, and found herself in 1847 with over $6,000,000 outstanding indebtedness on loans and subscriptions to railroads alone. The enterprises proved successful, however, and she was never heavily pressed to make good her guarantee.

III.138.7

—Maine, a lumber and fishing state, with a soil for the most part unadapted to raising grain, acting upon an absurd theory of encouragement to home producers, actually went into debt at the rate of $3 per head of her population, to pay bounties for the cultivation of wheat and corn, and distributed in one year over $150,000 in premiums on the production of less than three million bushels of grain!

III.138.8

—By 1840 the state debt of Pennsylvania had increased to $31,000,000, about $90,000,000 of which had been assumed in behalf of railroads and canals. Within two years the bank of Pennsylvania went down with a crash that echoed throughout the commercial world, and in August of that year the state failed to pay its interest. So bitter was the feeling abroad against the people of the defaulting commonwealth, that the Rev. Sydney Smith declared he felt inclined, if he met a Pennsylvanian at dinner, to strip him of his clothes and boots for division among the guests, most of whom had probably suffered by his state's dishonor!

III.138.9

—It was during this period that the word "repudiation," in its present commercial and political signification, came into use. There was a default in the interest on the bonds which the state of Mississippi had issued in aid of the Union bank, and after the authorities had in vain cast about for various expedients to meet the difficulty, the governor of the state, in a message to the legislature, broached the now familiar doctrine of repudiation, and suggested, in undisguised terms, his state's dishonor. "The bank," he declared, "has hypothecated these bonds, and borrowed money upon them of the Baron Rothschild; the blood of Judas and Shylock flows in his veins, and he unites the qualities of both his countrymen. He has mortgages upon the silver mines of Mexico and the quicksilver mines of Spain. He has advanced money to the sublime porte and taken as security a mortgage upon the holy city of Jerusalem and the sepulchre of our Saviour. It is for this people to say whether he shall have a mortgage upon our cotton fields and make serfs of our children"! To the honor of the state legislature, be it said, they rejected, with scornful emphasis, the disgraceful suggestion, and declared that the governor's insinuation that Mississippi would violate her solemn pledge was "a calumny upon the justice, honor and dignity of the state." Subsequent Mississippi legislatures show no traces of the honest spirit of this session. Post bellum repudiators have no more shameless example of flagrant dishonesty than that afforded by the successors of the very men who, thirty years before, declared that the mere suggestion of repudiation was an insult to the state (vide infra).

III.138.10

—One after another the spendthrift commonwealths felt the pinch of want, and when the public debt became, from the taxation which it necessitated, a private burden, repudiation followed as a matter of course. Numerous plans for compromise were canvassed; legislative committees were appointed, bills reported and conferences held with the representatives of the bondholders at home and abroad, but from year to year the bankrupt states drifted along, plunging, at intervals, more and more hopelessly in debt. Finally, the civil war swept away for the time all vitality from the bond question as an issue. Its revival as a political question, and its historical development in certain communities, where it divided parties and became the most potent factor in state politics, is given under the headings of the different states below.

III.138.11

—Georgia. Under the rule of the "carpet-baggers" the state was plunged into debt for all sorts of alleged public improvements. When the "conservatives," as the democrats were fond of proclaiming themselves, regained control, they at once set to work to devise pretexts for avoiding the obligations by which the state had been burdened by their opponents. A committee appointed by the first legislature at which the conservatives found themselves in the majority, reported in favor of invalidating, on the ground of fraud at their issue, six million of state bonds. The suggestion was at once acted upon, and the securities promptly repudiated. A constitutional amendment was then adopted, wiping out the bonds altogether. At the constitutional convention the bondholders offered to submit their claims for adjudication to the supreme court of the state, but the proposition was rejected by an overwhelming vote at the May election of 1877. To provide against any possible qualms of conscience on the part of succeeding legislators, a clause was inserted in the new constitution (sec. 11) prohibiting the general assembly from making any appropriation to meet interest or principal on the dishonored securities, with which were included all the war debts of the state. A sweeping majority carried this amendment at the election of December, 1877. The act of Feb. 25, 1874, had already deprived the governor of the power to lend the credit of the state by indorsement, except where the right to such had already vested. Soon after the passage of the repudiating amendments (in January, 1878), Gov. Colquitt was applied to for his official indorsement upon the debentures of the Northeastern railroad. After consulting the most eminent legal authorities in the state, who advised him that the right to such guarantee had vested in the company before the passage of the repealing act, he granted the application of the railroad authorities and indorsed their bonds to the amount of $260,000. His act caused widespread complaints, which his political opponents took pains to fan into a burst of popular indignation, by representing that he had willfully transcended his authority, and deliberately nullified the will of the people in favor of the corporation. He at once demanded a legislative investigation, and a committee, which examined the question with great care, reported in the only way that it was possible for them to conclude, that the governor had no option in the matter, but had simply done what he was legally bound to do. Much the same treatment was given to the $3,000,000 of bonds of the Brunswick & Albany railroad company, guaranteed by the state before the war, and disposed of mainly to capitalists at the north. The secession convention had granted immunity from confiscation to all public works. But in spite of this the road was seized upon as the property of alien foes. After the war the owners came forward to claim their property, and a compromise was effected upon their agreeing to complete the road, in return for which the state was to pay a subsidy of $15,000 per mile. This compromise was ratified by a democratic legislature in 1869; yet in 1871 Gov. Bullock took possession of the road, though the state had failed to pay the subsidy, claiming that the agreement had not been fulfilled by the owners. Henry Clews, Esq., of New York, who represented a majority of the bondholders, sold the bonds to German bankers at Frankfort-on-the-Main. In August, 1872, the general assembly declared these bonds null and void, and a constitutional amendment forbidding the payment of either principal or interest was carried in 1874.

III.138.12

—Louisiana. At the constitutional convention of 1879 a committee appointed to examine and report upon the bond question, recommended the acknowledgment of about $4,000,000 of these securities and the repudiation of nearly $20,000,000. The report declared that it was a matter of history that the state house had been seized by United States soldiers in December and January, 1872-3, and the legal legislature overthrown. That, therefore, the body of men alleged to have passed the funding act of 1874 was not a constitutional legislature, and had no power to bind a free people. That there was no evidence on file of any ratification of the so-called amendments of 1874, except the mutilated copy of what purported to be a certificate to that effect, signed by J. Madison Wells and others. "They are unable to concede," reported the committee, "that the funding of any portion of the debt has given it any greater validity than it originally possessed, and, on the other hand, they do not admit that the absolute repudiation of 40 per cent. of the debt detracts in the least from the validity of that which was honest and legal." The report concludes by a reference to the fact that the bondholders are mainly northern capitalists, and dismisses their claims in these remarkable words: "But may it not be in the order of the eternal fitness of things that those who directly or indirectly (unwittingly, it may be) aided to tear down the basis of our former prosperity, should share some of the ills that have so long and so powerfully borne down upon the once proud and wealthy people of Louisiana?" A minority report, protesting against the attempt to dishonor the state, was vainly offered, to stem the rising and angry tide of repudiation. "Every sentiment of honor and justice," said this paper, "demands that he who receives what does not belong to him should restore it. If the bonds are void, the state has received something for nothing. Law and justice concur in the enforcement of the duty on the part of the state to surrender that something to its true owner." This report declared that the state had received in cash $6,893,507.31 for securities funded at $7,294,744, all but $500,000 of which was to be wiped out. The wanton bad faith of the legislators who agreed to the majority report, is the more strongly emphasized by a reference to the opinion of the supreme court of the state, delivered only a few months before: "We regard the faith of the state as irrevocably pledged to the payment of her consolidated bonds issued under the authority of that act (the funding act of 1874). * * The contract with the holders of these bonds is one which, in the language of the constitutional amendment, the state can by no means and in no wise impair." This act, the court held, was approved Jan. 24, 1874, and settled beyond possibility of question by a constitutional amendment upon the same day: "This amendment has become a part of the constitution by its subsequent ratification at the polls." (State ex rel. Pacific R. R. Co. vs. Nichols, Governor, 30 La. Ann. Rep., 980.) A reiteration of what the court had already declared in 1875, when it said: "This amendment was adopted, and it now forms part of the organic law of the state." (State ex rel. Forstall vs. Board of Liquidation, 27 La. Ann. Rep., 577.) Moreover, the declarations of the repudiating committee regarding the condition of the state's resources and its inability to meet its honest debts are flatly contradicted by the words of the governor in his message of 1881: "The outlook for the state is most hopeful. The advantages of soil and climate are nowhere else equaled. * * The future for Louisiana is a grand one. It does not seem chimerical, when we look at our extraordinary advantages, to anticipate a future maximum production of $500,000,000 per annum. There is no reason for the continued cry of 'Poor Louisiana and her impoverished people'. We must realize the fact that she is rich, and force her to the front rank of states. * * Confidence will be restored; our bonds will be on the market at a reasonable interest, commanding a premium; capital will readily find its way here; and we will no longer be humiliated at the low credit of our state." Both reports were supported with vigor, but the repudiating element was too strong to be successfully combated, and after a hot debate an act, known as the debt ordinance, was adopted for submission to popular vote. This ordinance provided for retiring the bonds in exchange for a new issue, upon which the interest was scaled to 2 per cent. for five years, 3 per cent. for fifteen years, and 4 per cent. thereafter; with an option to the holders to exchange their bonds at seventy-five cents on the dollar for 4 per cent. semi-annual interest bonds. The consolidated bonds issued under the act of 1874, to be retired by this forced exchange, were pledged to pay 7 per cent. interest! The act was simply highway robbery by legislative sanction. The constitutionality of the debt ordinance was at once put to the test in two actions brought by John Elliott and others against the board of liquidation. The first was to enjoin the board from recognizing the ordinance and disregarding the funding act of 1874 and the constitutional enactment of the same year; the other, to compel by mandamus the payment of the interest on the consolidated bonds, and the levy and collection of a tax for that purpose. The recent decision (March, 1883) of the United States supreme court, upon the points at issue, held that the state had entered upon a voluntary contract in 1874, which had been violated by the act of 1880. But that there were no means of compelling the state's officers to carry out this contract, for the reason that the state as a sovereign commonwealth could not be sued without its permission. Upon this point the opinion of Chief Justice Waite reads as follows: "Neither was there when the bonds were issued, nor is there now, any statute or judicial decision giving the bondholders a remedy in the state courts or elsewhere, either by mandamus or injunction against the state in its political capacity, to compel it to do what it has agreed should be done, but what it refuses to do." A proceeding suggested by a correspondent of the "New York Nation," in February, 1878, (No. 660), was the last effort made to coerce the defaulting commonwealth. Before the adoption of the 11th amendment to the constitution of the United States, the supreme court had rejected the doctrine that a state could not be sued upon its own contracts. In the case of Chisholm vs. State of Georgia, 2 Dall., decided in 1792, Chief Justice Jay said. "It would be strange indeed that the joint and equal sovereigns of this country should in the very constitution by which they professed to 'establish justice' so far deviate from the plain path of equality and impartiality as to give to the collective citizens of one state a right of suing individual citizens of another state, and yet deny to those citizens a right of suing them." To nullify the principle which this decision established, the 11th amendment was passed in 1794, declaring that "The judicial power of the United States shall not be construed to extend to any suit in law or equity commenced or prosecuted against one of the United States by citizens of another state or by citizens or subjects of any foreign state." To avoid this constitutional bar the legislatures of New York and New Hampshire authorized the transfer to them by their citizens of the defaulted securities, and actions were then begun in the name of each of these states against the state of Louisiana. The supreme court, however, held that to allow such suits would be simply to permit the practice of a palpable absurdity, and the evasion of the 11th amendment. In other words, the court very properly refused to countenance a mere subterfuge by which private individuals, the real parties in interest, might dodge a plain provision of the federal constitution, and practically sue a sovereign state. Such is the history of the vain attempts to induce the state of Louisiana to keep its solemn pledges. That public dishonor entails a loss of private credit may be inferred from what follows; the words are those of a writer treating of the financial condition of the state in 1882. "The unsettled condition of the finances of the state for several years past has seriously impaired her growth and prosperity, causing a universal distrust which has not merely affected the credit and honor of the commonwealth, but has also, to a great extent, affected injuriously individual credit, prevented investment of foreign capital, and excluded immigration." (Ann. Cyc., 1882, p. 480.)

III.138.13

—Minnesota. A legislative committee in 1876 attempted to show that the state was under no obligation, legal or moral, to pay the railroad bonds guaranteed by her in 1858. Public opinion, however, was opposed to wholesale repudiation. In his message to the legislature, Gov. Pillsbury, after referring to various decisions upon the bond question in the courts of the state and of the United States, said: "With such unmistakable and imperative commands from the voice of law and equity and honesty, is the question not reduced to the simple one of our willingness to pay our honest debts?" There was at this time over two and a quarter millions of outstanding indebtedness of the $5,000,000 bonds issued in aid of certain railroads, the validity of which was disputed on the ground that the railroads had failed to comply with the conditions of the issue. The amendment of 1858, under which the issue was made, had been wiped out by another amendment in 1860; which also declared that the legislature should make no provision for payment of the principal or interest without submitting the proposition to the people for ratification. A compromise proposed in 1871, and agreed to by the legislature, was rejected by a vote of 21,499 to 9,293, not half the average vote being cast. The "Grangers," or "Patrons of Husbandry," had taken up the bond issue, and protested against their acknowledgment by the state, threatening to "scratch" all candidates for judicial office who would not pledge themselves against the validity of the bonds. One representative of grangerism testified before a senate committee of the United States that his notion was to elect judges pledged to "wipe out the bonds." When asked what he would do if the supreme court of the United States sustained their validity, he replied, "Wipe out the supreme court"! In pursuance of Gov. Pillsbury's suggestion the legislature, on March 1, 1877, created a board of commissioners of the public debt, and authorized the issue of new bonds to holders of defaulted securities on terms of compromise. The act was subject to amendment, to be submitted to popular vote. It provided for the sale of a portion of the "internal improvement lands" in aid of the proposed settlement. The amendment and the compromise depending upon it were rejected by a large popular majority. Again the governor, with commendable spirit, declared that although the result "indicates that they are not prepared to make settlement of this vexed question, my convictions as heretofore expressed upon this subject have undergone no change, and I earnestly hope that in the near future the people of our state will take a different view of the matter." By this time the repudiators had secured a firm grip upon the politics of the state. The national greenback-labor party, at a convention held June 10, 1879, after declaring in favor of the unrestricted coinage of silver, and the immediate repeal of the resumption act, "believing that its passage at the time was an infamous sin and crime against the debtor classes," made the following declaration in regard to the state debt: "We regard the old Minnesota railroad bonds as dishonest and illegal in their whole origin and history; a measure conceived in sin and brought forth in iniquity, and one that is not morally binding on the people of this state." Once more, in 1880, the governor urged settlement, insisting that it was possible without commercial distress. "The discharge of this debt," said he, "is demanded as a simple act of justice, which would be none the less imperative were it to involve serious sacrifices. But these are not required. The task is plain and easy, and level to the simplest comprehension. The exhibit of the state auditor shows that with a wise use of the internal improvement ands (which cost the state nothing, being a grant from congress) this can be accomplished at the present rate of taxation, without any increase of taxation." For the fifth time an attempt at settlement was made. An act was passed providing for the submission of certain questions to the supreme court of the state. The court pronounced the act void, but declared, at the same time, the invalidity of the constitutional amendment of 1860, on the ground that it impaired the validity of the contract made with the bondholders of 1858. This left the responsibility upon the legislature to act without appealing for ratification to the popular vote. An extra session was at once convened, which passed an act in accordance with the governor's suggestion. Under this act the bonds were scaled at 50 per cent. of their nominal value, with accrued interest, and exchanged for thirty-year 4½ per cent. "adjustment bonds." By the end of 1881, almost all the old bonds had been taken up. The people, at the general election of 1882, approved the proposition to apply a portion of the proceeds of the internal improvement lands sale to the bond sinking fund. These lands are said to be so valuable that only about $1,250,000 will have to be provided for by taxation.

III.138.14

—Mississippi. In 1875 $7,000,000 of "Union" and other bonds, issued before the war, were outstanding. No interest had been paid since 1842 (vide ante). The state made short work of the bondholders' rights. A republican legislature adopted and submitted an amendment, which was subsequently engrafted upon the constitution by a democratic legislature, and which read as follows: "Nor shall the state assume, redeem, secure or pay any indebtedness or pretended indebtedness claimed to be due by the state of Mississippi to any person, association or corporation whatsoever, claiming the same as owners, holders or assignees of any bond or bonds now generally known as Union railroad bonds or Planters bank bonds."

III.138.15

—Tennessee. At the close of the war the bonded indebtedness of the state amounted to about $43,000,000, which was subsequently reduced by sales of railroad property to about $23,000,000. Upon this amount the state found itself, in 1875, greatly in arrears for interest, and without provision for meeting the principal on those bonds which were already beginning to fall due. The heaviest creditors of the state proposed to the governor that he should suggest to the legislature the propriety of appointing commissioners to agree with them upon terms of settlement. In accordance with the governor's suggestion, a committee of five was appointed from the legislature, which, with five New York bankers, made up an arbitration board. A meeting held at the clearing house in New York, "to consider the embarrassment of the several southern states which are in default, and to devise a plan for the readjustment of their debts," appointed, as arbitrators on the part of the bondholders, Messrs. Geo. S. Coc, Jacob D. Vermilye, B. B. Sherman, B. B. Comegys, and Enoch Pratt. At the conference with the committee from the Tennessee legislature, the latter took pains to disclaim any power beyond that of conferring with the bondholders' representatives, and reporting such compromise as might be agreed upon to their legislature for ratification. The settlement adopted for recommendation was as follows: The debt, with arrears of interest to Jan. 1, 1877, should be readjusted at 60 per cent., and settled by a new issue of 6 per cent. bonds. In the meantime, on May 17, 1876, in response to an urgent appeal from Ex-Gov. Brownlow, the republican state convention at Nashville had passed resolutions denouncing repudiation in every form. The democrats, however, fought shy of the question, for the repudiators had already won some of their followers by urging the doctrine that the abolition of slavery amounted to a destruction of taxable property for which those who were responsible—meaning thereby the bondholders at the north—should suffer the loss. It was remarked at the time that this argument "wholly ignored the continued existence of the negroes and their production as making part of the resources of the state." (N. Y. "Nation," 1877, No. 636.) On Dec. 5, 1877, a special session was convened to consider the award of the arbitrators. A bill finally passed the senate, providing for an adjustment scheme by which the old bonds were retired at 40 per cent. of their face value, in exchange for thirty-year bonds, with interest at 4 per cent. for five years, 5 per cent. for five years, and 6 per cent. thereafter. This act was rejected by the house, on the ground that any plan which contemplated scaling the old bonds at less than 60 per cent. would not be accepted by the creditors. The legislature adjourned, after a three weeks' session, without coming to any definite results. A year later, Gov. Porter, in his message, stated that there were over $20,000,000 bonds outstanding, of which $11,000,000 had been declared invalid.

III.138.16

—The bond question had now become a distinct political issue. Although the party lines were not strictly drawn on the question, the republicans were generally in favor of meeting the debt in one way or another. The parties or factions were divided into four distinct groups: 1, wholesale repudiators; 2, those who favored retiring the old bonds at 50 per cent. of their face in exchange for 6 per cent. bonds, 3, those who favored scaling the bonds, principal and interest, to a third of their nominal value, and, 4, a party which approved the settlement urged by the arbitration committee. On these issues party lines wavered, ordinary majorities were shaken, and members of the assembly were elected because of their known standing on one or the other of these four schemes of adjustment. The finance committee reported a bill retiring different classes of bonds at different rates: some at "60 and 4," i.e., scaled to 60 per cent. of their nominal value, and exchanged for 4 per cent. bonds; some at "50 and 4," and some at "33 1/3 and 4." About $2,250,000 (mineral house bonds) were absolutely repudiated. Another class were to be scaled at 33½ per cent., and exchanged for non-interest-bearing tax warrants, receivable for state taxes and other dues to the state. After a long debate, during which every scheme was modified in one way or another, an act was passed by a close vote, March 28, 1879, providing for the retirement of most of the bonds at 50 per cent. in exchange for state fours. The provisions of this bill were supported by the railroad companies, which agreed to waive immunity from taxation and to pay taxes to such an amount as would leave about 40 per cent. of the burden to be borne by the people at 4 per cent. interest. The committee went to New York in April, 1879, where the compromise was agreed to by the representatives of the creditors, and the state seemed on the verge of a final settlement. But repudiating sentiments had made too strong headway with the people, who refused to ratify the compromise by a large majority at the popular election on Aug. 7, 1879. At their convention in the year following, May 6, the republicans declared once more in favor of the validity of the debt, insisting that any attempt to avoid it would be "downright repudiation, and an act of high-handed dishonor," and that any voluntary proposition from the creditors to take less than their claim demanded ought to be accepted as a favor. On the other hand, the green backers showed plainly enough that the taint of their financial heresies had affected their regard for a question of common honesty. Their platform contained these planks: "Resolution 1. That neither the state of Tennessee nor its citizens are bound in law or morals to pay the bonds issued in aid of the railroads, amounting to $25,000,000, and that such bonds are no part of the state debt. Resolution 2. That we are opposed to scaling the railroad bonds, and to any other act recognizing them, because the people of Tennessee do not owe them." The democrats, at their convention, June 8, 1880, recognized the liberal disposition of the state's creditors, and favored a settlement on the best terms possible for the state. Two minority reports, however, were so earnestly pushed as to show how large a portion of the party had succumbed to repudiating theories. One (the "Johnson Report") favored a settlement after canvassing among the people to learn the terms to which the majority would agree; the other (the "Garner Report") urged out-and-out repudiation, as follows: "§ 4. We are unalterably opposed to any settlement of the state debt by the legislature." After the adoption of the majority report, so amended, however, as to provide that the new coupons should not be made receivable for taxes, etc., 160 delegates left the hall, organized a separate convention, nominated S. F. Wilson for governor, and adopted a resolution declaring against the railroad bonds, the war-interest bonds, and the receivability of coupons for taxes and other state dues. The result of this split was, that the republicans carried the election of Mr. Hawkins, their nominee for governor, by a large vote. In 1881 a funding act, which had been carried through the house, passed the senate by a bare majority of one. But popular opposition to the recognition of the debt was still strong. Henry J. Lynn and others, claiming to be citizens and tax payers, applied to the court of chancery for an injunction, on the ground that the funding act was procured by bribery and fraud. The bill was dismissed, and, on appeal, the supreme court decided that the act which provided for funding the entire debt at par by 3 per cent. 99-year bonds, redeemable at any time after five years, was legal, except as to the provision which made coupons receivable for taxes, etc.; on the ground that the legislature could not "contract away" the revenue or enter upon an agreement which a subsequent legislature might not repeal. On May 19 the "60 and 6" act was passed, providing for the issue of new bonds at 3 per cent. interest for two years, 4 per cent. for two years, 5 per cent. for two years, and 6 per cent. thereafter, to be given in exchange for the old bonds scaled at 60 per cent. This was in accordance with a proposition from Eugene Kelly, Esq., of New York, chairman of the bondholders' committee. On Jan. 1. following, the comptroller reported that less than half of the old bonds had been funded. The bond question remained, therefore, unsettled, the democrats having split into "state credit" and "low tax" factions, with the republicans, for the most part, favoring a settlement on the best possible terms. The democrats, owing to these dissensions in their ranks were forced to hold the bond issue in abeyance. At their convention, June 20, they resolved, "2. While we accord to all an honest difference of opinion, we regard the enactment of the '60 and 3, 4, 5, 6' as unwise, because it is, in our opinion, not in accordance with the views of the people." Their third plank recommended funding the "state debt proper," the validity of which had not been disputed, at par, less war interest; and their fourth urged a tender to the creditors of a settlement of the remaining debt by ten-year bonds on the "50 and 3, 4" plan. Their nominee was Gen. W. B. Bate. One hundred and fifty delegates promptly bolted, approved the "60 and 3, 4, 5, 6" settlement, and nominated Jos. H. Fussell on the "state credit" ticket. The greenbackers, after repudiating the railroad bonds, and all but a small portion of the state debt, declared against the settlement even of that portion until ratified by popular vote, and nominated Jno. R. Beasley. Gen. Bate, the nominee of the "low tax" democrats, was elected. The "60 and 3, 4, 5, 6" plan is therefore stamped with popular disapproval, and the politicians will hardly venture upon the consideration of as favorable terms for the state's creditors in the teeth of the popular feeling. It is believed that the "readjusters" will consent to a settlement of the "state debt proper," less war interest, in full; with a provision for compromising the remainder by funding it in 3 per cent. thirty-year bonds, scaled at 50 per cent.; and the swindled creditors will have to make the best of a very bad bargain. The federal government loses by Tennessee's repudiation. At various times, from 1836 to 1851, the United States invested moneys held in trust for certain Indian tribes by the secretary of the interior, in Tennessee bonds. Up to Jan. 1, 1883, the amount due the government, with accrued interest, was $493,270. As the United States held the money in trust, the interest has been paid to the beneficiaries from time to time by congressional appropriation. As the debt has been repudiated by Tennessee, the tax payers of the nation have been, and will be called upon periodically to settle the debt of that state. It is claimed by ex-congressman William R. Moore, (vide letter to "N. Y. Herald," March 13, 1883), that both political parties in the state have again and again, through their governors and legislators, recognized the validity of the bonds which United States senator Harris declared void in the campaign of 1882. "Propositions," said Secretary Teller, in a letter to Mr. Moore, March 3, 1883, "have been made by the state of Tennessee, to issue new bonds for accrued interest on the bonds held in trust by this department, but the records do not show that any offer has been made by said state to pay said interest."

III.138.17

—Virginia. At the close of the war the public debt of Virginia amounted to about $41,000,000. In 1866 the auditor of the state reported that the interest account, to the amount of about $2,250,000, could not be promptly met. In the session 1870-71 the funding scheme was passed, by which the coupons of the new issue were made receivable for taxes, etc. The next legislature repealed the act, as containing provisions too favorable for the creditors, but the repealing act was not sustained by the courts, so the legislature adopted the expedient of taxing the funded bonds, evidence of the state's own indebtedness, ½ per cent. In 1874-5 "these measures had reduced the interest account from $2,500,000 to $1,417,000, but the taste for repudiation, or 'adjustment,' as it is called in Virginia, had set in and was growing, so that, after several years of cheating, the question is still a prominent one in the politics of the state, and it was only after a vigorous and excited canvass that the nomination of an open repudiator for governor was prevented. His successful opponent is now obliged to treat the subject with great caution, and there is every prospect that in the end 'readjustment' will carry the day." ("N. Y. Nation," 1877, No. 636.) In 1875 the interest account was nearly $3,000,000 in arrears, and the outstanding bonds in 1876 amounted to $29,489,326.38. On March 11, 1878, the legislature passed the refunding act, providing for the issue of eighteen-year and thirty-two-year 3 per cent. and 4 per cent. non-taxable bonds. In his message to the legislature, Dec. 4, 1878, the governor said: "As long as the state debt continues unsettled, there is an incubus upon the spirit and a clog upon the movements of Virginia. When it is settled honorably and finally, she will start upon a career that will not be unworthy of her history." One of the bondholders, a citizen of the state, published a statement at this time to the effect that the only possible remedy for the financial condition of the commonwealth was readjustment, i.e., scaling the old issue, and reducing the interest to 4 per cent. A bill was passed in February, 1878, but vetoed by the governor on the ground that it failed to meet the requirements of the situation, and was vague, unjust and unconstitutional. In the following December he urged a further attempt at adjustment with the creditors. By this time the issue was fairly before the people, and the state divided into "debt payers" and "readjusters"—a euphemism for repudiators. Early in 1879 the McCulloch bill, which provided for refunding $8,491,961 by a new issue, to be dated Jan. 1, 1879, payable in 1919, with interest at 3 per cent. for ten years, 4 per cent. for twenty years, and 5 per cent. for ten years, was passed. The state was to have the privilege of redeeming the new issue at any time after the first ten years, and the coupons were made receivable for taxes and other state dues. The readjusters, under the leadership of Gen. William Mahone, assembled in convention at Richmond on Feb. 25, 1879. After adopting a resolution professing adherence to democratic principles, they declared themselves formally separated from the democratic party, and resolved as follows: "3. That in any settlement with the state's creditors the annual interest of the recognized indebtedness must be brought within her revenues under the present rate of taxation. * * 6. That a settlement within the limitation designated is the utmost stretch of the people's ability to pay, and should be satisfactory to the creditor as the furthest exaction he can fairly insist on. * * 16. That full recognition of these principles and declarations by the people of Virginia and her creditors, is absolutely essential to any amicable readjustment, and no readjustment in which they, or any of them, shall have been neglected, can be final, certain and satisfactory." Gov. Holliday declared in his message that he did not believe a higher rate of taxation could not be borne when the object was to preserve the credit of the state. "Whatever may be the views of some," said he, "I feel that should the present funding bill be stopped in its execution, it would be a great misfortune. It has been regarded by the world as a fair and honest settlement between the commonwealth and her creditors. * * We have every reason to believe that, had no opposition been manifested and its repeal not been mooted, the bonds by this time would have been well nigh all brought in to be funded under its operation." The vote at the election of November, 1879, stood as follows: debt payers, 69,736; readjusters 77,070. 7,689 republicans voted with the debt payers, and 18,426 with the readjusters; a result which showed a large defection from the ranks of the regular republican party, and pointed unmistakably to the coming union. So-called republicans, who cared more for victory than principle, made haste to join in a coalition which insured them a place on the side of the successful faction, and their defection swelled the readjuster ranks to the dimensions of a working majority in the state. At the ensuing session of 1879-80 the notorious senate bill No. 176, impudently entitled "An act to restore the public credit," and known as the Riddleburger bill, was passed, repudiating over $13,000,000 of the state debt. It was promptly vetoed by Gov. Holliday. "I can not put my signature in approval to this bill," said he, in his memorandum. "I respectfully return it to your honorable body in which it originated, because I believe it to be in violation of the constitution of the state, in violation of the constitution of the United States, in violation of the spirit which has ever moved and inspired the traditions of the commonwealth and made her name so honored among men." After referring to the credit of the state, pledged as far back as 1838, the governor added: "no sooner was peace proclaimed than a general assembly, composed of her best citizens, men of the old régime, unanimously reaffirmed that obligation. This was repeated, in one form or another, not less than four times." The readjuster convention met July 7, 1880, with the issues and prizes of a national campaign before them. They indorsed the vetoed bill "as constituting the extreme limit of legal and moral obligations upon the part of this commonwealth to the holders of her bonds." Both readjusters and democrats favored the national nominees of the democratic party, and were careful to declare their belief that in national politics only national issues should be regarded. An attempt at fusion was made but failed, because, it is alleged, the readjusters were too grasping in their claims for the lion's share of the spoils in event of success. The futile negotiations only widened the breach, and finally the national democratic committee, seeing that a union was out of the question, and perceiving that this dickering with the repudiators was likely to lose the party votes elsewhere throughout the country, issued an address late in October, 1880, urging the democratic voters of Virginia to support the ticket of the regulars. Whereupon the chairman of the readjusters brought out a counter address, declaring that his faction were striving for a higher prize than "any abstract title to democracy," viz., the right of the people to govern their own state in their own way. The election resulted as follows: conservative democrats ("regulars"), 96,912; readjusters, 31,679; republicans, 84,020. Meanwhile the readjuster coalition had elected Gen. Mahone to succeed R. E. Withers as United States senator for the six years beginning March 4, 1881. In the national senate the parties were equally divided, thirty-seven republicans, thirty-seven democrats, and two independents, Mahone of Virginia, and Davis of Illinois. Gen. Mahone did not appear until the second day of the session, when the debate on the organization of the committees was at its height. The fact that he had taken no part in the democratic caucus, and proclaimed himself an independent, aroused the suspicions of the democratic senators who had counted upon him to give them a bare majority entitling their party to the rights of a majority in making up the senate committees, and upon his appearance he was at once attacked by Mr. Hill of Georgia, who accused him of treachery and bad faith. Gen. Mahone took the floor in his own defense and began a statement of his position. He declared himself a democrat in principle, but insisted that he did not owe his seat to the democratic party, and announced his intention of voting with the republicans in organizing the senate. Mr. Davis voting with the democrats, a tie was the result. Where-upon Vice-President Arthur cast the deciding vote in favor of his party and against the protest of the democratic senators, who endeavored to show that the vice-president had no vote upon a question of organization, even in a tie. Gorham was chosen secretary of the senate, and Riddleburger, the readjuster, sergeant-at-arms; a selection which gave rise to renewed charges of a "deal" between Mahone and the republicans. Their opponents made desperate efforts to stave off the election of officers by all sorts of dilatory measures, motions to adjourn, etc.; but Senator Davis then declared, that, having voted for the existing organization as he had felt bound to do, now that the majority, though a majority of but one, had changed, he would no longer stand in the way to block the business of the senate. This decided the matter, and the new organization was completed. Soon after the fall election of 1880 the United States supreme court decided, in January, 1881, in the case of Hartmann vs. Greenhow, Treas, etc., 102 U. S. Rep., that the Virginia act of 1873-6, which provided that the state treasurer should retain as a state tax 50 per cent. of the market value of the interest coupons on the bonds, funded and unfunded, could not be applied to coupons separated from bonds and in the hands of different owners, with out impairing the obligation with such bondholders, contained in the funding act of 1871, and the contract with the holders of the coupons. At the readjuster convention, June 2 and 3, 1881, the Riddleburger bill was again indorsed, and Mr. Cameron nominated for governor. The second place on the ticket was given to Jno. F. Lewis, who at the time was chairman of the republican state central committee. The republican committee at once convened, deposed Lewis by a vote of 15 to 2, and elected Gen. W. C. Wickham in his stead. Lewis protested, and a struggle at once began between those who favored the coalition with the readjusters and the "straight out" republicans. Both factions adopted platforms, the former declaring their reasons for allying themselves to the readjuster, or, as they called it, the "liberal" party, in opposition to the conservative democrats whom they dubbed "bourbons." Their manifesto upon the bond issue was as follows. "4. * * Abating no part of our determination to deal justly with all the creditors of Virginia, and to labor to pay every dollar she honestly owes her creditors, we deem it inexpedient and unwise to make separate nominations for state officers, and we declare in favor of hearty co-operation with all other citizens who support the candidates nominated by the anti-bourbon or liberal convention of June 2 and 3, 1881." The regular republicans, or "straight outs," also held a convention and put in nomination a separate ticket, with Gen. Wickham at the head. This was their bond plank: "3. That the republican party of Virginia hereby pledges itself to redeem the state from the discredit that now hangs over her in regard to her just obligations." On Aug. 4 the conservative democrats convened, denounced repudiation, and nominated for governor Jno. W. Daniel. The readjusters' fusion elected their candidates, Cameron and Lewis, and a majority of the state legislature. At the election for United States senator to succeed Gen. Johnson in 1883, the readjusters carried their candidate, H. H. Riddleburger, the author of the repudiation act, and with a working majority of six in each branch of the legislature, proceeded to carry out their schemes for repudiating the state debt by enacting the measures commonly known as "coupon-killers." The first of these laws, entitled "An act to prevent frauds upon the commonwealth and the holders of her securities," (passed Jan. 14, 1882), provided, under the plea of protecting the state against forged and spurious coupons, that no coupons should be received by the tax collectors in payment for dues to the state until tested by a legal tribunal. In other words, it required the receiving officer to whom coupons should be tendered under the act of 1871, for taxes or dues to the state, to give a receipt for the same as "held for identification," and then to collect the taxes in legal tender, coin, or national bank notes. He was then to mark the coupons so surrendered and deliver them to the court, with which the tax payer might file a petition to prove the genuineness of his securities, and if successful in his law suit have his money refunded! The other act practically refused mandamus in tax cases. The constitutionality of these enactments was at once put to the test. In March, 1882, Andrew Antoni tendered for taxes a coupon of 1871, and on the collectors' refusal to accept it as payment, applied to the state court for a mandamus. The court divided equally on the law of 1882; and, on appeal, the United States supreme court, Chief Justice Waite delivering the majority opinion, held (March, 1883) that the state was bound to accept these coupons as already laid down in Hartmann vs. Greenhow, (supra), but declared, as the supreme court had also held in Hoffman vs. Quincy, 4 Wall., 553, that so long as the state legislature did not impair any substantial contract it could change the form of the remedy, and that the right to appeal to the state court for adjudication upon the validity of the coupon left to the creditor an adequate remedy. "No attempt has been made," said Chief Justice Waite, "to fix definitely the line between alterations of the remedy which are deemed to be legitimate, and those which, under the form of modifying the remedy, impair substantial rights. * * In all such cases the question becomes, therefore, one of reasonableness, and of that the legislature is primarily the judge." After rehearsing the provisions of the act of 1882, and the steps which a tax payer had to take to enforce his rights, the chief justice said: "It matters not whether the coupons have been refused for the taxes, if full payment of the amount that they call for is actually made in money. A remedy, therefore, which is ample for the enforcement of the payment of the money, is ample for all the purposes of the contract. That we think is given by the act of 1882 in both forms of proceeding." The court took especial pains to say that the question was not, whether the collector might not be held responsible in damages if he attempted to collect after refusing to accept the coupons. "We decide only the question which is actually before us,"—plainly intimating that an attempt on the part of the collector to levy after such tender and refusal would render him liable. This reasoning, which to many seems rather specious, was not concurred in by Justices Harlan and Field. "No greater calamity," said the former in his dissenting opinion, "could, in my judgment, befall the country than the general adoption of the doctrine that it is not a constitutional impairment of the obligation of contracts to embarrass their enforcement with onerous and destructive conditions, and thus to evade the performance of them."

III.138.18

—The people of the defaulting states have not always relied solely upon an appeal to popular vote, legislative enactment or judicial decision for aid in their efforts to avoid payment of their honest debts. Voters have been coerced, by threats of heavy taxation, to lend their countenance to the schemes of the readjuster and the repudiator. In more than one state judges have lost their seats upon the bench because their decisions in favor of state honesty have given offense to the popular demand; and even force has been resorted to in some communities where the heavy interest tax has threatened a serious burden. In one county of Missouri, against which an interest judgment had been obtained, and mandamus to compel the levy and collection of a tax secured, an organized mob seized the books and expunged the levy. As may be seen from the decisions already noted, pronounced by the highest tribunal of the land, the defaulting commonwealths have matters entirely in their own hands. Under the 11th amendment no power can legally coerce a state to keep its solemn pledge. Whether a sense of national dishonor will ever prove strong enough to demand and secure the repeal of that provision, is a thing of doubtful surmise. But while that inhibition stands, a sovereign state possesses the royal right of snapping its fingers in its creditor's face. To the creditor no remedy is left save to rely upon the innate honesty of the people, and to wait for the slow revival of a healthy and honest public opinion. Hope of such in some communities rests, it must be admitted, upon but slight foundation.

GEORGE WALTON GREEN.

Notes for this chapter

It is impossible to state with accuracy the exact amount of the debt during this period. The table given is taken from an article by Robert P. Porter, "International Review," 1880, p. 556. Compared with other statements the figures seem by no means exaggerated.

Footnotes for REVENUE

End of Notes

The cuneiform inscription in the Liberty Fund logo is the earliest-known written appearance of the word "freedom" (amagi), or "liberty." It is taken from a clay document written about 2300 B.C. in the Sumerian city-state of Lagash.